Tuesday, July 6, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 48

Year 3, Week 48 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 78.3% (v 76.2% last week)
18 long bias: 21.1% (v 21.8% last week)
1 short bias: 0.6% (v 2.0% last week)

19 positions (vs 19 last week)

Weekly thoughts
Another very rough week for the markets, but one we were able to take advantage of to keep building up capital with some short term, short side forays. The Dow is now down 7 sessions in a row - a bit of a deceiving statistic since one single day of 0.2% gain can break other such streaks - but considering this is the worst performance since October 2008, you can see the dark action the past 2 weeks.  I continue to believe we are oversold and are due for a bounce.  What was necessary - and is begrudingly happening from the Kool Aid punditry - is a recognition that 'this time is different' and a credit inspired retraction is not your garden style recession.  Not to mention the structural issues facing the country in an increasingly competitive global marketplace.  I am now watching the economists scratch their head as they are shocked the "V shaped" recovery is not creating the 250-350K+ jobs it is "supposed to" aka what the "models tell us".  Of course, thinking for yourself and not just relying on historical models is apparently left to wacky bloggers such as this one. As this recognition happens, the prices in the market adjust and this is what has been happening in my opinion. 

Let's look at the 'action' from a technical standpoint.  Since bursting over the 50 day moving average 2 weeks ago Monday and creating a good old school 'head fake' the S&P 500 has essentially dropped 110 points straight down.  As the student body ran to the left and 'risk off' was the trade, it has been an unrelenting selloff; almost a full 20% correction in 2 weeks.  With old lows of S&P 1040 taken out it would seem unlikely this is over, but clearly an oversold bounce is past due.

Please note what is happening with those red and green lines above... we are about to experience what is called a 'death cross' in the technicians world, that is when a shorter duration moving average passes below a longer duration moving average - in this case the 2 most important MAs are involved, the 50 and 200 day.  Further, the slope of the 50 day is obviously down and the 200 day is now turning from flat to down - both bearish.  That said it's all about time frames - this is a longer term issue.  In the very near term, after "the bounce" ... whenever it comes, the action at S&P 1040 will be interesting.  If this bounce has no life, we will be rejected at or near 1040; if the bounce has some legs to it, a move to S&P 1070s or indeed even up to the 50/200 day moving averages is possible.  Depending on that 'action' near 1040 I'll make some forays either on the short side (if 1040 rejects) or long side (if 1040 is sliced).  In a perfect world, I'd love to see a move to the 50/200 day area to create some very low risk entries on the short side.   So let us see how the student body runs in the coming days and weeks.

The currency markets perked my ears last week as well.  I had been using the US dollar aka the best of the horses in the glue factory as a 'short' hedge against the market for many months.  It's worked out well, we had some options on UUP (a long dollar ETF) in the spring and then I just went with the ETF since then.  But I dropped that exposure last week since a "potential" sea change could be in the offing.  The dollar began to break support and indeed the Euro might be technically ready to break through some key resistance.

Now this could simply be the after shocks of a hedge fund blowing up some currency bets (forced to cover Euro short, dollar long) or it could be some crowded trades unwinding.  Or indeed world markets realizing there is only one horse in the world willing to spend like drunken sailor in face of yawning deficits.

For the portfolio, I actually went with the British pound as a replacement for the dollar long - mostly because I wanted to show moral support to our readers across the pond who now must have low self esteem after their awful showing in the World Cup the pound was well ahead of the Euro in any potential breakout to the upside. 

Also, the Euro still has some serious structural issues with 100 moving parts whereas the pound is one government, one country and easier to figure out.  That said, the Euro short is the consensus view (this morning's headline Bloomberg piece says so!) - so we'll see if the market punishes those on the crowded side of the trade.
  • The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy.  “The ECB is moving towards its version of quantitative easing."
  • The euro weakened 15% against the dollar in the first half on speculation record budget deficits from Ireland to Portugal and Greece will force governments to cut spending and reduce economic growth.
Again folks, none of these major currencies are in great shape.  It's all about relative badness.  If the Australian dollar or Canadian dollar did not get punished everytime the 'risk trade was off' they would be 2 options.  Another is the Norweigen krone (the only major govt running a surplus in Europe that I know of) but there is no ETF.  And as I said last week, the German mark would be a favorite of mine if there still was such a thing.  So to use another horse metaphor we're picking amongst manure - it's which manure is the flavor of the week/month.  At this point the market is heartily applauding Cameron's move to slash government spending.


After a busy economic week, heightened by continued bad news on almost all fronts the calendar is much lighter this week.  In fact other than the Thursday weekly jobless claims which now probably take on more importance as the punditry can no longer say for the 17th month in a row "don't worry about employment, it's a lagging indicator" the only key reports are Tuesday's ISM Services (big one) and Thursday's Consumer Credit.  With services dominating the U.S. economy, the employment portion of ISM Services will also hold sway.


For the fund, I took some short side trades on an intraday and overnight basis as I was first looking for a move down to S&P 1040 and then a break through.  I came into the week incorrectly looking for an oversold bounce... Monday was very quiet (even Monday magic is gone) and when Tuesday morning opened poorly I gave up on that long index trade.  Most of the damage to the market happened in the latter portions Tuesday but the break below S&P 1040 is actually when we made most of our money on the short side.  On the long side, I continued to change the shape of the portfolio - culling some weaker names and replacing with higher relative strength.  Will it matter?  With correlations at all time highs it seems doubtful but I'm still trying.  I also was able to buy some names that we missed in May as they finally relented.   Going into Friday's job report I was looking for a "ignore the news" reaction since the selloff the prior 2 weeks had discounted much of it, if not all.

I still am looking for that oversold bounce and as explained above I will analyze the action around S&P 1040 if and when to see what to do next.  I believe it is too aggressive to short here since an oversold bounce must come sooner or later, but I don't see enough to go 40-50% long, since the bounce could be very short lived.  In the intermediate term I would like to reduce the long exposure I put on last week either at 1040ish or 1070ish or up near the 50/200 days, and then focus on the short side again until this market can show enough strength to get back over the 200 day moving average.  So that's the game plan over the next month or two.

On the long side:
  • Tuesday, first thing I sold my TNA (3x small cap long) ETF that I had purchased the previous Friday hoping for some Monday bounce.  S&P 1070 had been my pivot point and premarket futures looked to open below that level, so it was to be sold no questions asked - turned out to be one of the better moves of the week despite taking some losses.
  • I closed the last of my Atheros Communications (ATHR) as the stock is trading as if orders are being cancelled by the hour.  Still like the name long term but right now it's simply not performing.
  • Valassis Communications (VCI) held up very well in the May selloff, but the June selloff finally sniped it.  It finally broke support - I never had a chance to really build the name up to a good sized trading position so I never took any profits I had in the name.  Instead it was closed at a small loss.
  • I restarted a position in Akamai Technologies (AKAM).
  • Thursday as the market finally really broke down below 1040, I became constructive on the long side.  I began stakes in two "non hedge fund centric" names - Dr Reddy's Laboratories (RDY) and Polypore (PPO).  I am hoping these names can somewhat avoid the risk on, risk off trade that dominates everything.
  • A bit later in the morning I began "high beta" hedge fund names VMWare (VMW) and Acme Packet (APKT) - these are high beta names that will trade with the market.  Risk on. Risk off types.
  • I closed Polaris Industries (PII) for similar reasons to Valassis - held up great in May relative to market but finally broke down in the June selloff.
  • Thursday afternoon I put on some index longs (TNA & SPY 103 calls) once the S&P 500 regained 1120 and seemed to hold it.   I bought some Netflix (NFLX) and Las Vegas Sands (LVS) - 1% allocations roughly, at the same time.
  • The "meh" reaction to the labor report Friday had me selling the index longs bought Thursday afternoon for quite small gains in the mid S&P 1020s.  The market actually went on to fall below 1020 before doing some kind of snake dance in the last 30 minutes of the session Friday. 
  • I closed Sandisk (SNDK) late Friday, since I had similar 'high beta' names that I was able to initiate or add to during the week, with better relative strength profiles.

On the short side:
  • As the market was very weak Tuesday I bought some SPY puts, in the July 104 and 103 areas - I was late to the game that day and since the selling was quite heavy was a buyer way down at S&P 1046... I sold some around 3:59 Tuesday as S&P 1040 broke and then an 'urgent buyer' showed up in the closing minutes to help the S&P recapture 1040.  I had expected more of a cascading selloff.   I sold the rest the next morning as S&P 1040 seemed to hold, for small gains.
  • The S&P 500 broke down below 1040 again Wednesday and I thought it too cute for the 'urgent buyer' to show up in the closing moments 2 days in a row to 'save the market', so I pressed a new round of shorts into the close.  Thursday a whole bunch of global manufacturing index reports came in weaker than expected and we had our moment....but the washout opening we were seeking was elusive.  Finally the weaker mfg & housng data in the U.S. circa 10 AM seemed to cause the sellers to show up.  In the 11 AM hour as the S&P drooped to 1110 and then bounced back closer to 1120 I let go of ALL short exposure, I had two 2.5% exposures into SPY puts along with a 4% exposure in "short TNA".  This was our big kill of the week.  
  • I closed the Powershares US dollar (UUP) long position (which I consider a short), and replaced it with Currency Shares British Pound Sterling (FXB).  I don't consider those a 'short' position as I did the dollar since there is no 1:1 inverse relation with the S&P 500, as the dollar seemed to take on.

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